An unsecured business loan is a great option to propel your growth without any collateral. This blog will cover how you can make the best use of such loans, in terms of infrastructure and operational capacity, to expand the potential of your business.
What is Unsecured Business Loan?
An unsecured business loan does not require the borrower to put up collateral, like property or assets. Lenders are more likely to trust these loans based on the business’s financial strength, creditworthiness, and ability to pay back.
The loans can be used for expansion, inventory, or other business needs. They can also have an approval process that is faster than you might see with a secured loan. However, they might be available at a higher interest rate, as they represent a greater risk for lenders.
Is a small business loan a secured or unsecured loan?
Depending on the lender’s requirements, a small business loan can be secured or unsecured. This is how –
- Secured loan: To secure the loan, the borrower offers down collateral, like property or assets. In the case of the business’s default, the lender may take possession of the collateral to recover the loan amount.
- Unsecured loan: This type does not require collateral and is granted based on the business’s creditworthiness and financial health. In general, unsecured loans attract higher interest rates because the lender assumes a bigger risk.
How to get unsecured business loan?
To secure an unsecured business loan, follow these steps –
- Assess Your Financials: Ensure your business has a good credit score, stable revenue, and a minimum annual turnover of Rs. 40 lakh for a year.
- Choose the Right Loan: Select a loan that suits your business needs. Options may vary based on loan amount and purpose.
- Check Eligibility: Ensure you meet the following criteria:
- Age: 25-65 years at loan maturity
- Business Experience: Minimum 3 years in operation
- Minimum Annual Revenue: Rs. 40 lakh for 1 year
- Prepare Required Documents: Collect the necessary documents, including:
- Identity Proof: PAN Card, Passport, Aadhar, etc.
- Address Proof: Utility Bill, Bank Statement, Voter’s ID, etc.
- Ownership Proof: Property documents like electricity bills or municipal tax bills.
- Business Proof: GST registration, Shop and Establishment certificate, Tax Registrations (VAT/GST), etc.
- Submit Your Application: Complete the online form or visit your bank’s branch to submit documents and business details.
- Review Loan Offer: Once approved, review the loan terms, including the interest rate, which typically ranges based on the loan amount and tenure.
Interest Rate & Charges –
- Interest rates depend on the lender but are typically competitive for unsecured loans.
- Processing fees: Up to 2% of the loan amount
- Prepayment Charges: Up to 4% of the outstanding balance
- Other fees may apply, including documentation charges, cheque dishonour charges, and late payment penalties.
Key Benefits of Unsecured Loans for Small Business Growth
- No Collateral Requirement: Unsecured loans mean you don’t have to pledge any collateral, so you can protect your personal and business assets.
- Time-Saving: After approval, funds are promptly disbursed to help you fulfil your business requirements without delays.
- Help Develop Your Credit Profile: If you pay off an unsecured loan responsibly, it will positively impact your credit rating and make it easier to get financing in the future.
- Quick Approval of Loans: Your loan will be approved quickly, so you can get started with your business plans without wasting time and making the most of each opportunity.
- Custom Repayment Options: Flexible repayment options allow you to properly align your loan repayment schedule with your business’s financial cycle, which helps ease cash flow management.
Mistakes to Avoid When Applying for an Unsecured Business Loan
- Ignoring Eligibility Criteria: The eligibility criteria of each lender differ. Ignoring these may result in your application being rejected or delayed. Be mindful of the lender’s prerequisites, such as turnover or business experience.
- Applying for Multiple Loans at Once: Do not submit multiple loan applications simultaneously; it can confuse lenders and worsen your credit rating. Submit one loan application at a time and confirm that it is the best fit for your scenario. – Waiting until the Last Minute to Apply: If you defer submitting your loan application until the last minute, you may feel pressured to make hasty decisions.
- Financial Supervision: Before accepting a loan, a lender will examine your financial situation. If you do not measure your income, costs, and cash flow, you may receive unpleasant remarks and be rejected for a loan.
Future of Unsecured Business Loans
The Unsecured Business Loans market is experiencing significant growth. It is projected to expand from $4.5 trillion in 2023 to $5 trillion in 2024, driven by an 11% CAGR. The market is forecasted to reach $7.67 trillion by 2028, supported by factors like the rise of small and medium-sized enterprises (SMEs), fintech innovation, and government regulations.
Unsecured loans, which require no collateral, are increasingly popular for SMEs due to their ease of access. This makes them a critical tool for business growth and financial management. Digital transformation and improved access to credit further fuel this expansion, fostering a competitive and dynamic lending environment.